Economics of aging population

With the Chinese Government urging the residents of Shanghai to have a second child, after three decades of pursuing the one-child policy, indications are directing at the population aging in China that will place about one-third of urban Chinese becoming 60 or above by 2020. This would greatly reduce the proportion of working people, in relation to the retired or otherwise nonworking population in China.

This is something what is called population ageing, a highly generalized process, most advanced in highly developed countries, and to some extent affecting most countries. Population ageing has slowed down in countries of Europe and some other well developed countries, but it will now hit some of the Asian economies and elsewhere where economic development is faster.

Two generalized causes for rising percentage of aging population are rising life expectancy and declining fertility. Development and greater availability of wealth for the masses increase life expectancy rates and longevity. It increases the average age of the population by raising the number of years that each person is old relative to number of years in which he is young.

A decline in fertility increases the average age of the population, as the rate birth comes down drastically compared to a rapidly falling death rate. These are two strong economic forces as lesser number of children means lesser expenditure on education and other aspects for the governments and parents (a good thing now but bad for the future), and older population increases state expenditure on healthcare, pensions and other state benefits for older people.

Of these two forces, it is declining fertility that is the dominant contributor to population ageing in the world today, especially in the developed countries. It is more disadvantageous for the economy as there won’t be enough working population that contributes to economic growth.

Asia and Europe are the two regions where a significant number of countries will have to face severe population ageing in the near future. Many countries will face a situation where the largest population component will be over 65 and average age will be approaching 50.

There are many economic implications associated with the ageing population. Older people often have higher accumulated savings per head than younger people. But older persons may be spending less on consumer goods. This will result in lesser demand for such goods and lesser profits, productivity and employment for people in such sectors. Incidentally consumer sector contributes one of the largest percentages in GDP of any nation. In other words, such economies can do badly compared to nations with a higher percentage of working population.

Depending on the age ranges at which the changes occur, an ageing population may result in lower interest rates and the economic benefits of lower inflation. But lower inflation need not be an indicator of financial health of a nation as lower inflation often can be a result of lesser demands for goods and services that contribute more to the GDP. An example is the case of countries like India where there is a negative inflation or deflation, but the prices of daily consumption goods like food items increase and the people are compelled to spend more as in a high inflation.

Population ageing would present governments with hard choices between higher taxes, reweighing of tax from earnings to consumption and a reduced government role in providing healthcare. Whenever there are financial crises, like the present recession, governments tend to take stringent measures to save the economies from total collapse. The consequences of these financial measures will be felt more in the future than now. It is a hard truth that most f us do not like many economy-saving measures introduced by the governments, most notably in the US, and in UK where economists are of the opinion that it will take at least five years for the country to limp back to normal.